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Asian financial systems needs stronger safeguards: ADB

MANILA: Asian financial systems, particularly in China, India, Pakistan and Vietnam, must strengthen watchdog bodies and tighten disclosure rules to avoid a recurrence of the 1997 financial crisis, Asian Development Bank (ADB) said on Friday.

The Manila-based ADB said a lack of adequate supervisory and regulatory mechanisms and a distorted incentive system had helped spark the regional meltdown. "All four countries have to improve their financial strength and prudential regulation," the ADB said in a report on Asian financial markets.

The study advised the crisis-affected countries of Indonesia, South Korea, Malaysia, the Philippines and Thailand to "maintain the initial desperate attitude toward the economic reforms" that they adopted after the crisis.

While recommending policies to avoid a repeat of the turmoil, the ADB said there was no standard measure and that each country would have to adopt reforms suitable for their economy.

The bank study said a financial crisis can occur "even when the traditional fundamentals appear to be in line."

It warned that such crises had become more frequent since the early 1980s due to increased volatility of private capital as financial markets integrate globally.

These periods of turmoil are "expected to occur more frequently as global integration and financial liberalisation proceed," it added.

The ADB called for "properly sequenced financial and capital account liberalisation, and regional funding and/or guarantee mechanisms," to go with any macroeconomic expansion after the crisis has passed.

To reform their banking sectors, Asian nations need to define "best practices" and "compare their situation with international experiences and academic findings."

The ADB emphasised that banks must operate as "viable commercial enterprises" and recommended reducing government-directed policy loans, privatising government-owned banks, improving governance, and promoting competition. "Unless banks are made more commercially oriented and nationalised banks are re-privatised, it will be difficult to argue that crisis-affected countries have succeeded in their banking sector reform," said ADB chief economist Jungsoo Lee. "Non-performing loans are still high in some countries. (The) unfinished agenda is long".

The report also called for "a legal infrastructure.... for financial supervision, bankruptcy and foreclosure" including the repeal of bank secrecy laws to enhance transparency.

Capital market reforms were one area highlighted in the report. The Asian crisis highlighted one important lesson: short-term foreign capital cannot finance long-term projects. Domestic sources of long-term funds are needed." "However, long-term bond markets cannot be developed without improved corporate governance or an expanded investor base," the ADB added.

Government measures to control capital markets had proved ineffective, the ADB said, remarking that "they tried to do too much, dictating resource allocation of financial institutions and bailing out inefficient and virtually bankrupt banks, financial institutions and state-owned enterprises. AFP